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How high is ‘high income’?

Richard Livingston

Let’s get one thing straight: If you’re earning $150,000 a year you’re not on struggle street. But does that mean you’re a ‘high income earner?’

Prime Minister Gillard recently said high income earners would be losing some super tax concessions. Since those comments, a tax on withdrawals by the over-60s has apparently been ruled out.

This is good news if you’re the person with $100m in your SMSF. But if you’re trying to grow a small super balance and you’re earning $150,000 a year it might not be.

At the moment the Government’s plans for super are a mystery, so let’s make an educated guess. They’ve said the ultra-wealthy are safe, and those earning $300,000 plus have already been hit with a super tax surcharge. If the Government’s going to plug budget holes they’ll need to set their sights lower than that.

Where exactly? Well, our top marginal tax rate kicks in at $180,000 and $150,000 is a popular number for ‘means testing’ away entitlements. So, about that range is a pretty good guess.

Our politicians bandy around the ‘high income earner’ phrase like there’s a ready supply of champagne swilling, gazillionaires getting away with fiscal murder. But if reality is taking tax concessions away from those saving some of their $150,000 for retirement then we need to say ‘hold on a second’.

Remember, we’re not talking about increased tax rates for those earning $150,000 a year but a special penalty for the savers – those the super system is meant to be encouraging.

Current super rules allow a pre-tax (tax deductible) contribution up to $25,000 a year. This limits the benefits available to indisputably high income earners – making the system fair. But it also says that our super system is designed to encourage saving of up to $25,000 a year (which, by the way, is hardly likely to provide a luxurious retirement).

Does our Government really think the average person earning $150,000, paying almost a third in income tax plus mortgage repayments, can afford to save $25,000 on top? Our household saving rate sits at just over 10% of GDP. This, and plain logic, suggests the system is designed to encourage saving by those earning more than this amount. To encourage someone to save $25,000 a year and look to tax them extra for doing so makes no sense.

If what we’re really saying is that those earning $150,000 don’t pay enough tax then let’s have that debate. Not that I’m calling for higher taxes. With an income tax, GST, FBT, land tax, payroll tax, stamp duty, petroleum rent resource tax, mining tax, carbon tax and an impressive array of excise taxes, we’re hardly Liechtenstein.

But when the problem is ‘not enough revenue to pay the bills’ it’s the right discussion. Let’s talk about taxes and spending, not encouraging retirement savers to save less.

If tax concessions are to be targeted, negative gearing is the stand out candidate. Unlike super, the tax benefits are unlimited – you can save millions if you earn and borrow enough – and the policy of promoting higher property and share prices is absurd.

The current system is in need of genuine reform as it has many weaknesses. Over-generosity towards those trying to accumulate retirement savings isn’t one of them.

Richard Livingston is the managing director of Intelligent Investor Super Advisor, an online service providing SMSF and investing advice. This article contains general investment advice only (under AFSL 282288).